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Hedge fund Third Point, after years of strong returns, has registered big losses after misreading the market. Now it faces a flood of customer withdrawals.

Dan Loeb, one of the most successful hedge-fund managers of his generation, is having a rough year.

Funds at his Third Point fell by about 1.6% this year through August after tumbling 21.8% or more in 2022, according to investors. Both figures are worse than those of peers and the broader market.

Loeb, who oversees roughly $11.7 billion, said he expected higher interest rates to take a bite out of the U.S. economy this year, so he turned cautious. As a result, he didn’t own enough technology shares to fully benefit from the summer’s AI-powered rally that drove stocks such as Nvidia skyward.

Compounding the error, Loeb recently boosted stakes in tech and other riskier companies, just in time for those stocks to stumble in recent weeks.

Strategies that once produced big gains for him—shareholder activism, short selling and startup bets—also haven’t helped.

The missteps highlight the perils of wagering on a market in which interest rates are surging but the economy continues to grow, a phenomenon that has surprised some pros. For much of the year, high-price tech and other risk stocks kept moving higher, ignoring the rate rise, though they’ve faltered lately.

Loeb has turned things around after past stumbles, often by shifting gears. Third Point posted a double-digit loss in the first quarter of 2020 when the arrival of the coronavirus pandemic sank stocks, but it ended the year up about 19% thanks in part to bets that consumer and commercial debt would be more resilient than many expected.

In early 2009, on the heels of the 2008 financial crisis, Third Point’s assets dropped to $1.4 billion from $7 billion. A decade later, they were up to $15 billion. Loeb has scored some of his best returns during periods of turbulence for debt markets, for example betting on distressed Greek bonds in 2012.

Now, Loeb is betting on an eventual credit crunch as companies are forced to refinance their debt amid high interest rates, something he expects to create investment opportunities for his funds.

Some investors aren’t waiting around to see if he can stage another comeback. They’ve requested withdrawals at the end of September amounting to $850 million, or more than 7% of the firm’s assets, according to people close to the matter. More than $1 billion of Third Point’s total capital is held under terms that prevent it from being easily withdrawn.

The expected withdrawals add to the $1 billion or so that was redeemed from Third Point funds during the first eight months of the year, according to the people.

Sacramento County Employees’ Retirement System, SCERS, which first invested in Third Point in 2012, requested its roughly $60 million investment back earlier this year. The decision was based on Third Point’s performance and a decision to transition away from “growth-oriented” hedge funds, said Steve Davis, chief investment officer at SCERS, in an email. Investors asking for their money back get it over the course of several quarters.

“I’m not thrilled with the results, but each time we’ve had 20% drawdowns, we’ve more than made up for them,” Loeb said in an interview with The Wall Street Journal.

Loeb, who began his career as a junk-bond salesman catering to investors including hedge-fund titan and current-Carolina Panthers owner David Tepper, launched Third Point in 1995. Since then, the 61-year-old billionaire has wagered on and against stocks and debt instruments while agitating for changes at companies including Nestlé, Sony, and Yahoo—sometimes with acid-tipped letters to boards of directors.

More recently, he has used Twitter, the social-media platform now known as X, as a forum to share and debate ideas. Since joining in 2020, he has amassed over 100,000 followers and weighed in on investments and economic policy, offered life advice and extolled the quality of Loro Piana sweaters. Loeb has also spoken publicly about his renewed interest in his Jewish religion and how it has given him an improved perspective on life.

Third Point racked up average annualized returns of 16% after fees over the past 28 years. As recently as 2021, the firm’s hedge funds rose as much as 27%.

But Third Point’s results this year are a far cry from the S&P 500’s total return of 18.7% through August, and also below the 4.7% gain for the average hedge fund, according to HFRI.

Last year’s losses at Third Point exceeded the 18.1% decline for the S&P 500, including dividends, and the 4.1% average loss for hedge funds.

In the past few years, Loeb has made high-profile pushes for significant changes at companies including Intel, Disney and Shell. The results have been mixed.

While Intel quickly hired a new CEO Loeb praised, its stock has done little since. A campaign to split Shell into two companies was unsuccessful, though the oil giant did simplify its structure and Third Point has made money on its investment. A more than $1 billion bet on Disney has made the firm roughly $200 million so far.

This year, the firm launched a campaign against Bath & Body Works in February, and though it gained a board seat in a settlement, the retailer’s stock is still down about 20% for 2023.

Third Point’s recent bearish bets have been ill-timed. The firm shorted companies including Carvana and Evergrande, but Loeb, worried about a rising market, closed many of those positions in 2020 and 2021 before they could pay off.

In the second half of 2022, Third Point added to its short positions, only to be caught off-guard when the market started racing upward in 2023.

In 2021, venture-capital investments in cybersecurity firm SentinelOne and fintech lender Upstart Network produced big gains for Third Point after the companies went public. That year, Loeb raised a venture fund and hired former Goldman Sachs analyst Heath Terry to seek out additional investments. Another Third Point executive, Bob Boroujerdi, started focusing on crypto investing.

The firm sold most of its stake in Upstart before it tumbled, but SentinelOne was a losing position last year, as was electric-vehicle maker Rivian Automotive.

Third Point made a sizable investment in FTX that became worthless when the crypto exchange imploded last year. Terry and Boroujerdi left the firm in late 2022.

Loeb attributes the continued strength in the economy to government actions and earlier stimulus that have left consumers and companies flush with cash. That has delayed “the kind of credit cycle we had hoped for from the investment side,” he said.

Loeb maintains that debt troubles are on the way. He said so much corporate debt will mature and need to be refinanced over the next few years at higher rates that it will pressure various bonds, loans and other so-called credit investments.

Other investors are also cautious. Bridgewater Associates has told clients that rising bond yields will crimp economic growth and stock and bond prices. Victor Haghani, a former senior executive at Long-Term Capital Management who now runs investment manager Elm Wealth, says U.S. stocks offer the lowest expected return relative to safe investments since early 2007, despite their recent losses.

For Loeb and others, betting on a credit crunch carries risk. Corporate earnings have been robust and unemployment remains low, suggesting that distressed opportunities may not emerge as he expects.

Third Point has been hiring staffers with credit and lending experience so it can deploy capital when the next cycle arrives. It recently tapped a senior investment specialist from New York Life, Chris Taylor, to run its private credit business. Taylor will help raise money for a new private-lending fund, Loeb said, and some of those loans will be added to his main hedge fund.

“I don’t know if it will happen in 2024 or 2025, but we’re pretty confident we will see an avalanche” of private and other companies that need to refinance their debt, Loeb said. “We want to be good and ready to deploy capital when the next cycle comes.”